The key to building wealth? Start early, author says

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What’s the best way for young investors to build wealth for retirement? Ignore your human instincts, says a new e-book targeted at 20- and 30-somethings.

“If You Can: How Millennials Can Get Rich Slowly,” was written by William Bernstein, a retired neurologist, who has authored several books about investing. Although Bernstein manages investments for high-net-worth individuals, he decided to write a book for young investors because he is concerned about their financial future.

“I want to do something for young people because, I mean, they’re screwed,” he said.

“They don’t have pensions anymore. They probably won’t benefit as richly from Social Security as their parents will. They don’t have a choice but to do this (save for retirement) on their own.”

Despite the dire outlook, Bernstein says there are things young people can do to secure their financial future. In fact, the steps are relatively simple — as long as you stick with them for the many decades you’ll be planning for retirement.

“It’s like saying, ‘If you want to lose weight, you should exercise more and eat less.’ It’s simple, but 99 percent of people will not be able to execute it,” he said.

Here, you’ll find a summary of Bernstein’s advice for how to save for retirement, as well as what you need to do to stay on track.

• Save 15 percent every year.

The first step Bernstein recommends is to save 15 percent of your salary every year. Do that and you should have a plump savings balance by the time you hit retirement age.

For example, let’s say your annual salary is $50,000 and you contribute 15 percent each year to a 401(k), including any employer match. By the time you reach full retirement age at 67, your balance would grow to $1.6 million, assuming a conservative 5 percent annualized return and yearly wage increases of 3 percent.

The key is to start saving early.

Bernstein suggests getting going — even if you can’t afford the full 15 percent right away — by age 25. Start much later, and you may have to put aside more of your salary every year to have a comfortable nest egg.

• Choose three index funds.

How should you invest the money you’re saving? You don’t have to be a stock-picking guru to build wealth, Bernstein says. A simple portfolio made up of three low-cost index funds — a U.S. total stock-market fund, an international total stock-market fund and a U.S. total bond-market fund — will suffice.

• Keep spending in check.

Once you’re saving regularly and investing in a simple but diversified portfolio of index funds, the next thing to do is to make sure you stick with the plan.

One of the biggest hurdles is overspending, Bernstein says. Small expenses, such as a cable-TV package or coffee addiction, can easily chip away at your savings goal, especially when you’re on a tight budget. So pay yourself first: Have money put into a 401(k) or savings account before you get your paycheck.

• Think long term.

It’s human nature to react to immediate risks, Bernstein says. It’s hard for us to take the long-term perspective that financial markets require. As such, we have to learn to tune out the daily noise (i.e., what you hear in the news) and accept the fact that you will lose money in the market sometimes.

But those losses usually don’t last. Studying a little financial history, another one of Bernstein’s suggestions for staying on track, will help you realize that.

“Once you’ve read the script, you know how the movie ends,” he says.

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